TAKING A POUNDING

Sterling’s plunge has left holidaymakers in despair. But how worried should we be long term? There are valuable lessons from history...

WHEN holidaymakers stood in line to change their money at airport exchange desks yesterday, they faced something of a shock.

At Gatwick, one bureau was selling dollars for pounds at a rate of one to one, the worst rate in history.

At Heathrow, meanwhile, a travel journalist was quoted £117 to buy 100 euros, which meant each pound was worth a pitiful 85 cents.

Such are the consequences of the plunging pound, which reached a two-year low of $1.21 and €1.08 on Tuesday. And even though sterling recovered a shred of respectability yesterday, the fact remains that the pound is currently the worst performing major currency in the world.

A few figures tell the story. As recently as the summer of 2014, the pound was valued at $1.71. Two years later after the EU referendum, it collapsed to $1.32, and although it clawed back a few cents afterwards, it has never come close to regaining its former position.

Since many of us see the pound as a symbol of British national identity, it is natural to wince at the spectacle of its decline.

Painful

But right now these figures are painful news for the millions holidaying abroad this summer, for whom they mean more expensive ice creams, fewer meals out and bigger credit card bills.

Holidays abroad are expensive enough as it is, especially if you’re going to increasingly overpriced destinations such as France and Italy.

For the Government, though, what makes this so dangerous is not just the impact on British holidaymakers, fumbling for change in the bistros of Paris and the pizzerias of Florence.

It is the psychological impact: the humiliating sight of a breakneck decline in one of the great totems of British prestige.

For the pound is more than just another currency. Sterling has long been one of the supreme symbols of British pride, independence and economic virility, which is why so many people were deeply opposed to Tony Blair’s pet project of joining the euro. As the expression ‘sound as a pound’ suggests, sterling once enjoyed an ultra-reliable reputation. But the fact that you rarely hear that expression these days tells its own story.

Far from being a symbol of economic strength, the pound has too often been a badge of weakness, as the workshop of the world has struggled to come to terms with the rise of foreign competitors.

Indeed, time after time during the last century, prime ministers have been defined — and destroyed — by the struggle to prop up its value.

In 1931, for example, the first stable Labour government, led by Ramsay MacDonald, collapsed in acrimony after it became impossible to defend the pound’s position on the Gold Standard, where it was wildly overvalued at a fixed rate of $4.86.

After World War II, with Britain’s finances exhausted by the struggle against the Nazis, the pound’s value was fixed at $2.80. But in the eyes of the markets, even this lower rate overestimated its real worth, not least because British manufacturing was in headlong retreat.

It was pressure on the pound, for example, that forced Sir Anthony Eden to abandon the operation to retake the Suez Canal from Egypt in 1956, perhaps the greatest diplomatic humiliation in our post-war history.

And 11 years later, when Labour’s Harold Wilson was forced to devalue the pound by 14 per cent to just $2.40, his reputation took a hit from which it never recovered.

In a disastrously misconceived TV broadcast, Wilson assured the nation that ‘the pound here in Britain, in your pocket or purse or in your bank’ had not been devalued. But this was nonsense.

Aggrieved

Then, as now, a lower pound meant higher prices, and everybody knew it.

As a result, aggrieved British shoppers gave Wilson the boot in the next election, three years later.

The most chastening humiliation of all, though, came in the autumn of 1976, after years of strikes, blackouts and double-digit inflation had destroyed confidence in Britain’s ability to manage its economy.

By September, with investors rushing to get rid of their sterling holdings, the pound was in free-fall, hurtling towards a then unprecedented low of $1.63. In an extraordinarily melodramatic climax, the Labour Chancellor, Denis Healey, had to turn back from Heathrow Airport, where he was due to fly to a finance ministers’ meeting in the Far East, and return to London. There he negotiated a record bailout from the International Monetary Fund, worth some £12billion today. Britain, once the world’s banker, had become the world’s beggar. And with inflation apparently out of control, the electorate once again took their revenge at the next election.

So should Boris Johnson be losing sleep over the decline of the pound?

Not according to some Brexiteers, who argue that a lower pound is something to celebrate.

As they point out, a strong pound is not always an unqualified blessing.

During Margaret Thatcher’s first term in the early 1980s, for example, the pound was so strong, thanks to high interest rates and North Sea oil, that British exports became prohibitively expensive, driving the economy into recession and throwing millions of people out of work.

Exposed

Indeed, according to some Brexiteers, we should cheer a falling pound, since it will make our products cheaper abroad, boosting British business, turbo-charging the economy and providing countless new manufacturing jobs.

Unfortunately, very few economists or businessmen find this remotely plausible. Nor do I.

For one thing, these days most British manufacturers rely on imported components, which would be far more expensive with a lower pound. So their goods would not be cheaper after all.

And the idea of a devalued pound unleashing an exports boom has long since been exposed as a self-deluding fantasy. Back in 1967, Harold Wilson told the nation that a lower pound meant we could ‘sell more goods abroad’. No such boom materialised.

It did not materialise in 2008